ESSAYS ON BORROWING-CONSTRAINED AGENTS IN A DSGE MODEL

This thesis is an attempt to contribute to the literature on New-Keynesian Dynamic Stochastic General Equilibrium models with heterogeneous households. In this respect, the economies are characterized by the presence of savers and borrowers that interact in the credit market. Borrowers and savers are modeled using a modified version of the mechanism proposed by Bilbiie, Monacelli and Perotti (2012). They indeed differ in their degree of impatience: both agents are intertemporal maximizers - since borrowing and lending take place in equilibrium; and, financial markets are imperfect. Particularly, we focus on the interaction between fiscal and monetary policy and their redistributive effects. More in the detail, the thesis is composed of three papers. In the first paper, we study the dynamics of the model in response to five shocks, under three different assumptions on the labor income tax rates: a) equal taxes, both agents face the same labor income tax rate; b) partial redistribution, both agents pay a tax but the tax rate on borrower labor income is lower than the tax rate on saver labor income; c) full redistribution, saver labor income is taxed while borrower labor income is subsidized at the same rate. In the analysis of expansionary fiscal policy, public debt increases more in a context of partial redistribution than in a context of full redistribution, due to the internalization of government budget constraint by savers. In addition, a negative saver tax shock has a negative impact on redistribution, which is exacerbated under partial redistribution. Finally, a negative borrower tax shock has a negative impact on redistribution when borrowers receive subsidies, because savers are completely discourages to save. In the second paper, following Galì (2014), we study the effects of a shock to government purchases under two alternative financing regimes: (i) monetary financing; (ii) debt financing. Particularly, we focus on the redistributive effects of the two regimes and we find the following. Both regimes imply a redistributive effect from savers to borrowers, measured in terms of the ratio between the consumption of borrowers and that of savers. The redistribution is much greater in the money-financed fiscal stimulus, where the consumption ratio is more than three times higher than the implied one in the debt-financed fiscal stimulus. Borrowers are better off also in terms of their relative labor supply. Finally, with respect to the representative agent model, the presence of borrowers enhances the impact of the fiscal intervention on aggregate output, when spending is debt financed. Remarkably, with respect to Galì (2014) the same regime implies a reduction of the debt burden instead of an increase. In the third paper, using a Bayesian likelihood approach, we estimate the model presented in the second paper to analyze the main driving forces of output developments in United States. This paper investigates the role of fiscal policy over the aggregate US business cycle. Fiscal policies were substantially muted.